Q2 2023 Summit Materials Inc Earnings Call

Good morning.

My name is David and I'll be your conference operator today.

At this time I would like to welcome everyone to the summit materials to Q twenty-three earnings call. Today's conference is being recorded all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there'll be a question and answer session. If you'd like to ask a question. During this time simply press the Starkey followed by the number one on your telephone keypad.

Like what's your all your question Press Star one once again.

Thank you Andy Larkin, Vice President of Investor Relations you May begin your conference.

Hello, and welcome to summit materials second quarter 2020 results Conference call yesterday afternoon, we issued a press release detailing our financial and operating results. Today's call is accompanied by an investor presentation, and the supplemental workbook, highlighting key financial and operating data all.

All of these materials can be found on our Investor Relations website.

Management's commentary and responses to questions on today's call May include forward looking statements, which by their nature are uncertain and outside of summit Materials' control.

Although these forward looking statements are based on management's current expectations and beliefs actual results may differ in a material way.

For a discussion of some of the factors that could cause actual results to differ please see the risk factors section of summit Materials' latest annual report on Form 10-K, which is filed with the SEC.

You can find reconciliations of the historical non-GAAP financial measures discussed in today's call in our press release.

Today I am pleased to be joined by Anne Noonan, Summit's, CEO , Scott Anderson, our Chief Financial Officer.

And we'll begin with the business update Scott will then review our financial performance and then we'll conclude our prepared remarks with our view on the path forward.

After that we will open the line for questions out of respect for other analysts in the time, we have a lot to please limit yourself to one question and then return to the queue. So we can accommodate as many analysts as possible in the time, we have available I'll now turn the call over to Ann.

Thank you Andy and a warm welcome to everyone. Joining today's call at summit materials. The teams across our footprint have a lot to be proud of a remarkable second quarter results, which included several safety operational and financial records clearly signaled that our strategic focus as well as our safety first approach to everything we do is culminating in <unk>.

Amanda success across all important measures of our business.

For safety, we are halfway through the year and our recordable incident rate is trending ahead of target as we collectively emphasized the leading metrics and technologies that help prevent injuries minimize lost time and keep our employees as well as our community safe safety at summit is a perpetual work in progress, but it is an everyday value where we <unk>.

Our people and aim for continuous improvement on our journey towards zero harm.

Financially the second quarter extends momentum from earlier in the year and puts us on very solid footing to again raised our financial commitments for 2023.

And importantly, we have taken strategic steps that continued to strengthen our capabilities and our portfolio in a way that ensures we are building a summit that can meet tomorrow's challenges sees its opportunities and deliver attractive growth and profitability for our shareholders.

On slide four I'm pleased to review the financial highlights from the second quarter for which there are plenty to cover here you can see we delivered outstanding record setting performance across nearly all metrics.

Pricing momentum for each of our lines of business and in each of our local markets was the primary fuel for revenue growth and even stronger profitability growth, we realized mid teens pricing growth in every business driven by inflation justified pricing actions in combination with sharp execution of value pricing principles.

Cash gross profit and adjusted EBITDA, each increased roughly 17% the strongest second quarter growth rate since 2017 as positive price net of cost more than offset lower, albeit resilient organic volumes in the quarter.

Given the substantial performance tailwind a more constructive view on second half operating conditions.

Contributions from recently completed acquisitions that I'll discuss momentarily, we are confident and again raising our adjusted EBITDA expectations for 2020 three.

I'll spend more time on the embedded components of the outlook later in our prepared remarks, but the bottom line is that we are capitalizing on market opportunities raising the bar operationally and well positioned to deliver significant profitable growth in 2023 for the organization and our shareholders.

Our progress is most evident in our summit scorecard on slide five we grade ourselves in a very transparent and consistent manner to reinforce our strategic and financial direction externally and despite inflationary impediments were delighted by the strides we're making against three financial targets.

Beverage at two three times was flat sequentially.

Versus the prior year, maintaining our leverage while adding attractive asset to our portfolio, it's an especially positive story, considering we remain well below target and therefore have the headroom available to aggressively pursue organic and inorganic growth opportunities ROIC.

ROIC of 10, 1% is a new elevated summit high crosses over our target threshold having.

Having reached our goal of a minimum we viewed this achievement not as a stopping point.

Either as a starting point, we intend to build upon.

Especially in a higher rate environment, we know it's critical to continuously scrutinize the returns of each of our assets. Unfortunately that discipline is now reliable part of our organizational DNA and finally, our last 12 month adjusted EBITDA margins set a high watermark at 23, 5% up 70 basis points.

Chile and more than a full percentage point better than at this point last year.

This advancement clearly embodies positive trends for price and cost executing against our self help margin opportunities and reflecting a more advantaged portfolio, where we're leading in the right markets and determined to achieve our 75% target for EBITDA generated from our upstream businesses.

Obviously, we have more ground to cover to reach our 30% goal. We know progress won't always be linear, but I can say without equivocation that we are motivated and committed to reaching the elevate summit margin target, we set back in 2020 one.

We have complemented our financial progress by strategically leveraging our fortified balance sheet to strengthen the composition of our portfolio via value, creating M&A in the second quarter. We completed three acquisitions that meet our criteria for portfolio optimization that we previously outlined and can be seen on slide six.

As we strive towards our horizon two objective of at least 75% of adjusted EBITDA from aggregates or cement, we acquired two pure play aggregates businesses that enhance our reserve positions extend our market leadership in Missouri, as well as into North, Texas, and Oklahoma markets and position those businesses too.

Capitalize on local market opportunities. Additionally.

Additionally, with the purchase of Arizona materials summit enters one of the fastest growing msas with the leading integrated construction materials asset. This acquisition achieves footprint expansion into targeted geographic white space and positions us to benefit immediately from favorable growth conditions in Phoenix in 2022.

The second consecutive year population growth in Maricopa County was the largest of any county in the U S.

This continues a secular trend for robust domestic migration into the Phoenix MSA and supports a deep and ongoing need for single family residential construction Phoenix and the surrounding area also promises to be a prime market for meaningful and sustainable commercial construction.

Arizona is a leading market for the onshoring and re shoring of heavy industrial manufacturing. They have led the nation in chip investments, there's twenty-twenty, establishing the Phoenix area as a destination for large scale semiconductor manufacturing like the ones already announced by Taiwan semiconductor as Intel, but private <unk>.

Investments stretches beyond semiconductors with several electric vehicle electric battery and energy projects announced for Phoenix and nearby markets and then finally, the public end markets, which will be roughly 20% of our Phoenix business will benefit from a legislative capital budgets for Arizona D O T a $3 1 billion.

Fiscal 'twenty 'twenty, four which is 53% higher than fiscal 2023 levels. The point is entry into this rapidly growing MSA provides summit with attractive near term opportunity, but also a runway to build out a more extensive materials oriented girls platform in that geography over time.

If you consider each acquisition individually each presents compelling value creation for summit, and our shareholders and collectively they underscore our intention is to play offense and horizon to buy aggressively yet purposely advancing the portfolio in line with the disciplined framework that Richards, our portfolio mix and generates.

Substantial value with that let me hand, it over to Scott to take you through the quarter in more detail.

Thanks, Anne and I'll begin on slide eight with a review of the business segment results for the quarter.

Let's start on our West segment, where we witnessed a very nice rebound following the first quarter hampered by wet and cold conditions in Salt Lake City.

On a reported basis net revenue was up nearly $50 million with roughly half coming from organic growth and the other half coming from acquisitions.

Aggregates pricing remains a very positive story with second quarter, and first half pricing up 18, 5% and 21, 6% respectively.

While price growth is strong across the west segment, it is particularly robust in Texas, including our core markets of Houston, and North, Texas Importantly, the demand environment has proven especially resilience.

Second quarter volumes for aggregates and ready mix demonstrated substantial sequential recovery following challenging Q1 weather conditions that thankfully abated in Q2 for.

For asphalt pricing and volume growth of 16% and eight 3%, respectively, largely reflect a healthy infrastructure backdrop, especially in north, Texas, our largest asphalt market.

Segment, adjusted EBITDA increased 23, 5% due in part to contribution from M&A, but mostly reflecting a positive price cost dynamic.

For our East segment net revenue decreased nine 3% exclusively due to divestiture as organic revenue was actually up approximately $17 million in the period aggregates pricing increased more than 10% led by growth in Missouri, and Kansas. Despite divestitures egg volumes were a positive fueled by solid.

Growth in Virginia, and James is notable.

Notably in the coming quarters, as we lap our 2022 divestitures, what will emerge as an ex dominated portfolio.

We're beginning to see that reflected in our adjusted EBITDA margins second quarter margins increased more than 300 basis points and year to date EBITDA margin is up over 450 basis points relative to the comparable prior year periods.

Thus as design or divestitures moves in combination with greater greenfield's contribution to create in each segment capable of delivering very attractive run rate profitability.

Lastly, pricing for our continental cement business increased 16% year over year and accelerated sequentially as the team is executing on the pricing plan with <unk>.

Hi, first price increase currently in the marketplace.

Adjusted EBITDA increased 22, 3% in Q2 fueled by positive price momentum reduce distribution costs and greater contribution from Green America recycling, a key growth driver and margin enhancer for cement business.

On slide nine we present, the pricing profile by line of business and the clear takeaway is that each business line was able to sustain very healthy pricing momentum in the second quarter, we know that as we move into the back half of the comparisons will get incrementally more challenging but that doesn't change. The fact that we are operating in a very.

Constructive pricing environment, we've implemented fresh pricing across our footprint and across our businesses for aggregates. They differ in terms of timing and by market, but generally fall within that mid single digit range on cement as we previously discussed we have implemented a midyear price increase of $10 a ton in a similar time.

Yes, Lee reflects inflationary input costs ongoing tightness in supply and demand conditions and the unique value we bring our customers.

Especially along the river, where distribution conditions can be challenging we've invested behind our product and our distribution network to ensure security of supply and top tier customer service.

Factoring in the pricing actions across the AG and some that we have consequently upgraded our materials pricing forecast for the year on average, we're now expecting pricing to be in the low teens range and for cement, we're refining our expectation to mid teens for 2023 versus double digits previously.

For the downstream, we continue to pass along higher cement costs via ready mixed price increases with both Houston and Salt Lake delivering low teen pricing gains relative to Q2 2022.

On asphalt price grew 17, 9% in Q2 and for our two largest markets, which comprise roughly 80% of our total asphalt business, North, Texas and the inner mountain West the pricing backdrop is very healthy and underpinned by robust public backlogs.

Shifting now to volumes on slide 10, and overall I'd characterize the demand environment is pacing with or better than our expectations with expectation in regards to non res and public end markets and better than expectations in regards to residential demand. These trends are most visible in the sequential improvement.

He makes an aggregates organic volume growth rates.

Growth trends improved eight three.

Three percentage points for ready mix and one four percentage points for aggregates from Q1 to Q2.

And had we not had a temporary pullback in our British Columbia volumes, we would have been experienced positive organic <unk> growth in the period.

Nevertheless, residential activity in Houston and to a lesser extent Salt Lake City has proven more resilient than our expectation and that's resulted in volumes holding up relatively well.

Forcing that flattish quarterly and year to date volumes largely reflect a capacity constrained environment and a relatively consistent with how we see things moving forward and for asphalt strong year to date organic growth is tracking slightly ahead of our mid single digit growth expectation for public end market. This year.

But still serves as confirmation that we're seeing the positive benefit from the Iia impacting our business.

Moving to slide 11 for a look at cash gross margins and walked last headwinds certainly continued in the second quarter. We are seeing early evidence of cost abatement across several cost buckets.

Cost moderation together with the compounding impacts of pricing actions and a sharp focus on operational excellence clearly makes us confident that conditions are ripe for margin recovery and then expansion.

The total company GAAP cash gross profit margin expanded 280 basis points in Q2 and is up 290 basis points year to date, driven primarily by cement and the product lines of business.

Or some that as we mentioned earlier price execution alongside unique self help margin opportunities like our Davenport storage dome full production conversion to Portland limestone summit and expansion of our Green America recycling is powering substantial and sustainable gross margin growth.

With regards to products encouragingly, both asphalt and ready mix experienced cash gross margin expansion. This quarter. Despite persistent cost headwinds. Our teams are passing through inflation justified price increases executing on short load fees, where and when appropriate and in the process of adding points of margin.

Embedded in this process is a selective and unapologetic approach to the downstream, where we compete in the right markets with advantaged assets.

Turning to aggregates cash gross margin was virtually flat in Q2 versus the prior year. This represented an improvement year on year trends versus Q1, 'twenty, three but still short of where we'd like to be due to two factors first the prior year period had favorable cost recognition timing that did not repeat this year.

Second we experienced product and geographic mix headwinds relative to a year ago quarter controlling for these impacts unit profitability would've increased roughly 20% in the period. This underlying trend improvement feeds our overall view of the gross margin improvement for <unk> is on the horizon and should be imminent.

Before wrapping up I'd like to refresh, but also reiterate our perspective on cost trends for 2023.

You recall, we had previously discussed mid to high single digit cost inflation for 2023 and that still feels like a reliable and reasonable estimate what we saw in the front half was in the high single low double range. So we expect second half inflation to approximate that mid single digit range clearly cost pressures are uneven with diesel and.

<unk> costs coming down while other things like equipment labor and maintenance costs remained quite sticky. Therefore, our leadership team will continuously stress controlling our controllable and more specifically emphasize executing on our commercial and operational excellence plans.

I'll wrap up on slide 12, where adjusted EBITDA margin increased 220 basis points year on year to 28, 2% driven by cash gross margin expansion as G&A spend ticked up but is in line with our revised expectations that Dan will cover shortly.

Adjusted diluted net income and adjusted diluted earnings per share improvement reflects strong operating results, partially offset by higher interest expense.

And for the purposes of calculating adjusted diluted earnings per share. Please use a share count of $122 million, which includes $118 9 million class a shares and $1 3 million LP units.

With that I'll now turn it back over to Anne to provide an update on our 2023 Guy.

Thank you Scott in yesterday's release, we again raised our 2023 adjusted EBITDA guidance. This time to $560 million at the midpoint up from 510 million previously and now we anticipate mid teens percentage growth in adjusted EBITDA for 2023.

Given our recent portfolio moves as well as the vitality of the current operating environment. We thought it would be useful to bridge from our previous expectations to where we are today on slide 14.

Clearly our record setting Q2 was well ahead of the expectations we characterized in may.

I wear to quantify as roughly 7 million was from any quarter acquisitions, and 15 to 20 million can be attributed to better than forecasted second quarter performance. Looking forward you can layer on roughly $12 million and adjusted EBITDA for the remainder of 2023 from recently completed acquisitions that weren't previously income.

Operator.

Turning next to our year to go updates for price volume and cost, having now implemented and executed pricing actions across the enterprise, we have better visibility to end market traction for each of our lines of business and while not uniform. We have seen very solid price realization and can now incorporate what we expect to generate from these mid year price.

To put a finer point on it we were out with mid single digit price increases in our AG market and the $10 per ton for cement went into effect July 1st overall market receptivity has been broadly positive. The one area. We're watching closely and that's not unique to summit is import influenced Smith markets.

What may emerge as freight rates have come down the dollar strengthened and oil prices have fallen is imports pressuring certain markets.

The ramification may be that you see price realization varied between import export markets and those that are more inland for us that would primarily be our Louisiana market and we have factored this assumption into today's revised outlook.

Similar to price. We are also upgrading our volume expectation for the second half on the back of residential resiliency.

If you recall in May we discussed residential declining 25% in 2023, while also leaving the door open for further revisions now we are revising that expectation to down 20% for the year, we feel comfortable recalibrating residential demand based on what we see on the ground in Houston, where activity continues to improve and.

Economic conditions support further recovery and acceleration of single family construction. Meanwhile, in Salt Lake City, while activity is still slow relative to Covid era activity now that weren't there a weather related Q1 complications we have a better view on conditions and think that the bear case scenario is unlikely to play out.

We believe Q3 and Q4 will be sequentially stronger and we are hopeful this key market will build nice exit velocity heading into 2020 for.

That said, we continue to reflect a longer more protracted normalization profile for salt lake into our latest forecast.

Regardless of the near term recovery trends, we have strong conviction in the long term growth and potential for each of our major residential markets. Each have sound economic engines that should power long run growth in Houston, the energy sector, a vibrant port and a growing medical community is bringing jobs and solid economic growth to one of the law.

Our just housing markets in the country.

And Salt Lake and emerging Tech hub alongside tourism is the backbone of their economy and should support wage and job growth for the foreseeable future and both cases supply levels are more than a month below what we would regard as healthy and we believe strongly that we are playing in advantaged markets aside.

Aside from residential we are maintaining our demand outlook for nonresidential at flattish and public at up mid single digits for this year.

If we were to add color to each it would be that nonresidential growth will be project and timing dependent if certain projects in our footprint commenced in the second half that growth will be positive, but that's still uncertain and for public we have strong conviction that will then well within our outlook and that's supported by robust backlogs in our largest public.

Markets.

Putting it altogether, if before we were expecting volumes down mid single digit for this year. We are now low to mid single digits with aggregates and ready mixed down cement flattish and asphalt experiencing volume growth that proxies are public demand outlook.

Lastly on cost we are reiterating our outlook for mid to high single digit variable cost inflation. This year, although as Scott said, we expect a moderation in the pace of inflation in the second half consistent with easiest prior year cost comparisons the main change to our previous cost outlook regards G&A, where we are now called.

For between 205 and $215 million in G&A for 2023, or approximately 110 billion year to go spend largely to fully account for performance based compensation.

Rounding out our outlook items, our midpoint assumptions for interest expense is approximately 110 million to reflect a higher rate environment and capex of 250 million, which we increased to reflect capital spend for our recent acquisitions.

Let me sum it up by coming back to one of our elevate summit metrics adjusted EBITDA margin.

For 2023, thanks to performance to date as well as upgraded expectations. We now feel confident raising our full year margin outlook to between 23, 5% and 24%.

Feasible step up from 2022, and if achieved would be an all time summit record.

No matter what way you look at it we are pacing towards a record year for our business operationally strategically and financially our elevate plan is working and when we stay true to execute against the capabilities and priorities you see on slide 15, we have a unique and sustainable model for meaningful growth.

We want to thank our shareholders for their continued support and now Scott and I would be happy to answer your questions.

Thank you at this time I'd like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad, we'll pause for just a moment to compile the Q&A roster, we'll take our first question from Trey Grooms with Stephens. Your line is now open.

Yeah, Thanks, and good morning, and Scott and Andy.

Well I was trying to work them nice work on the margins there in the quarter, particularly.

In the cement business and I guess also the product side as well could you talk about you know the primary drivers there I know you touched on some of them, but maybe.

Maybe you could dive into some specifically around submit and then maybe kind of discuss your thoughts on the sustainability of the margin improvements youre seeing there.

Yeah, Trey So you know honestly speaking our team have done a fantastic job on execution under David <unk> leadership in cement and really.

I would just to add to the latter part of your question I believe it is very sustainable as you recall, we set our north star objective for EBITDA on a sustainable basis on a trailing 12 month at 40% and the team has been on a multi year plan to achieve that and if you look at where we are I'm just trailing 12 months.

Right now the team has achieved 36, 7% and that's really through a number of levers and this journey started back in 2020, I'm, where the team is hyper focused on customer segmentation to expand margins and on our supply chain optimization, so between 2020 and 2021 the team really focused there and started.

This margin accretion path more recently, it's really been driven by four key areas, so pricing value pricing working with our customers to really get the value of our products and expand margins has been very strong on execution. The second area I'd highlight is around our investment in the Davenport dome, which as you recall brought down our call.

Again margin accretive and made it more safe for our employees, while also providing our customers with security of supply. We also invested in our grinding capacity and then the third area P. L. C. We were the first in the U S to move with the conversion Portland limestone cement, which as you know is adds capacity is good for our carbon be.

And also expands our margins by having a lower cost and then the final area, which is extremely margin accretive as our Green America recycling, which we've invested to expand and then 2023 alone that's generating 14 million EBITDA on our base revenue of 25, so very margin accretive and the path continues because we.

Just announced last quarter, our Davenport investment in non has waste to get the flex fuel technology in and that'll allow us to convert up to 50% of our fossil fuels, reducing our costs, even further by reducing coal and pet coke in our kilns. So overall the team's done a great job on this path to 40%.

And we're very confident that we can get that sustainable 12, trailing 12 months margins, but there's a number of levers strike as you see from that from that list I just gave you.

Yeah. Thanks, Thanks, and that was some really good color I appreciate it hats off to you and the team on the great work there I'll pass it on thanks.

Hi, great.

And next we'll go to Keith Hughes with Truest.

Thank you our question is on the volumes in ready mix.

Problem for a couple of quarters as well.

The weather and the other issue is cleared what do you. What do you think that's going to look like in volumes in the second half of the year.

Well really the ready mixed volumes are being driven primarily by our residential and our nonresidential segments.

You know clearly we started the year out when we gave our first guide say in residential we've done 30%, we upgraded that last quarter and were upgrading it again to 20% and last quarter. If you recall Keith it was very much about Houston being better than we thought and really there you've got those larger builders that are able to leave.

Going into the rates.

[noise] abate some of the concerns around affordability and spur new market growth on homes Salt Lake said he started the year very with no with very bad weather. So really lost 50 days right at the beginning and we were very pleased to see it come back on here in Q2, but it has had a short season and it's coming from very high highs.

There were starting to see it pick up and you should expect as I said in my prepared comments Q3, and Q4, we'll see more volume come in on that so redi mix has been if you look at the guide to guide. The one that we is we've increased versus our last guide and we remain confident in it now that being said it's still.

Down versus you know COVID-19 ear at levels are.

But we think the fundamentals for residential are very strong demand is still being driven by household formation by high income by consumer confidence supply has been driven very low inventories. Those two markets. One is two six months in Houston of inventory in Houston, and Salt Lake City only has two months you've got there also.

So the resale market is very challenged and also you've got builder confidence. So overall, we'll see ready mix improve but we're not leaning into it very heavily at this point.

Okay. Thank you.

Yeah.

Thanks, We'll go to Derek Schmoyer with loop capital Your line is open.

Oh, hi, thanks, congrats on the quarter and the outlook.

I Wonder if you could speak on M&A.

You made several acquisitions here recently, thanks for the detail there, but you know your balance sheet now is below three times leverage.

Which was your goal and I'm, hoping you could talk a little bit about your desire perhaps to use your balance sheet to make additional acquisitions from here.

Yeah. So we were really pleased if you recall the last few quarters I've been talking about this rich pipeline Garik that we were working on and obviously three of those acquisitions came to fruition them all with the ability to advance our materials led position and nothing changes were at two three times at the end of the quarter, we have a lot of headroom to.

Growth the pipeline is very strong our teams very active disciplined though as we've said we would be we've stated are elevated strict goals and the Arizona acquisition is a great example of we set about with key targets in key geographies that had strategic high growth and that's exactly what you can continue to see from us you'll see.

Materials led going into strategic high growth markets, just like Arizona and the discipline that we've had before them. So we have a lot of room. We feel this is the best value for our shareholders by reinvesting in the business in the form of M&A and also our greenfield and organic growth.

Yeah.

Alright, well next go to Mike Dahl with RBC capital markets. Your line is now open.

Thanks for taking my questions just a follow up on your system. Then can you just.

Kind of a contribution.

The quarter and remainder of the year, so from a full year standpoint.

On a pro forma basis, and just help us fully quantify what these add on in terms of EBITDA and maybe revenues as well and then can you talk to get to the acquisitions, where existing markets. One was new so in the existing markets, maybe talk to some of the synergy opportunities as well.

Yeah, I'll I'll answer the latter part of that question and then I'll, let Scott give you the specifics on the actual contribution so two of the aggregates acquisitions. One was in North Texas is really one quarry. It helps us build out an existing market that we're in and prove our vertical integration I'm. So good aggregates pull through Great example of extending our reserves.

The other one was in northwest, Missouri, and its three Flores and that's a great example of being margin accretive extending our materials led position in Missouri, and its right beside our existing footprint.

So we should be able to as we go into these generally we'll look to take one to two turns post synergies off and it's really back office our pricing in our on our operational excellence that we put into these acquisitions and as you know it's in the DNA of the company Mike that we just do this very well and the teams already executing extremely well against that.

Scott maybe you talk to the specific contribution from Mike Yeah, Mike I'm just on.

Our second quarter performance, you can use $7 million.

EBITDA from the acquisitions and then on the go forward outlook, you'll see it there in our slides that we've got $12 million attributed to that.

M&A.

Yes.

Okay. Thank you Mike.

Mike.

Yes, I guess, the <unk> performance in <unk>.

Small quarter for us.

19 million that Youre outlining should should we just kind of round up to being a $20 million a year type of contribution.

Yeah, that's fine.

Okay.

Thanks, Mike.

Next we'll go to Anthony Pettinari with Citi. Your line is now open.

Hi, good morning.

You know it involves a man.

In cement you talked about maybe some increased competitive intensity in you know important exposed markets and I'm just wondering I mean, if that's a comment on pricing is that something that you are seeing currently or that.

Maybe you anticipate.

Seeing you know in the second half or going forward or just wondering if you could give any more color on that comment.

Yeah, I think what's you know as I said in my prepared comments first of all you know our river markets are largely insulated from import exposure. The one area. We have is Louisiana, which is about 10% of our volume just put in perspective, there you see freight rates going down you see high demand and so there.

I would say imports are pressuring a little bit more in Louisiana, and we saw that as we went for a midyear price increase that being said, we'd extremely strong execution, along our river markets that are not importing imposed and so were watching as I don't think it's a huge factor to worry about moving forward. It just you know everyone had this very big price increase it.

The beginning of the year, we went through the mid year price increase the team had excellent execution in all of our other markets. So.

Something to watch imports are always something we watch very carefully, but we're not overly exposed to it as a company.

Okay. That's helpful I'll turn it over.

Thanks Anthony.

We will go to filling with Jefferies. Your line is now open.

Okay.

Go ahead, Phil Your line is open Phil maybe in Jordan.

Okay go ahead, Phil Your line is now open.

Sorry about that can you hear me now.

Yeah.

[laughter].

Sorry about that congrats on another strong quarter. My question is for Scott.

Aggregates, you know just from a demand and pricing has been really strong margins Ben.

A little less robust you talked about confidence in driving margin expansion should we expect that to come through by the back half.

You guys have talked about our norstar for cement from a margin profile, how should we think about the path for margins than the average business. When we kind of look out in the back half going to 224th that ability to kind of drive that expansion going forward.

Yeah, Phil actually I'm glad you asked the question about margin expansion and ex.

As you can see from our results here in Q2.

We did improve over Q1, and it's something we're definitely intently focused on getting that expansion and as we look into Q3 and Q4 the back half of the year.

Really it comes down to two things we've got a we got a good read on on price. So it really comes down to volumes and cost and volumes appear to be holding up relatively well. So really it's on the cost side and we are seeing the costs start to moderate the inflation is starting to moderate and our operational excellence.

Improvements that we are working towards are really starting to deliver now. So you can see we built hubs, we narrowed that gap in Q2, and I think you'll see expansion in Q3.

So that's where we're headed we do have a north star target at 60% for our AG gross profit margins and we are intently focused on continuing to get in that expansion as we head towards that 60% Yeah I'd just add Phil that as you look at the runway towards that we have as Scott pointed out you've got your operational here.

Excellent you also have the impact of our Greenfields mature are extremely margin accretive and then you've got like the acquisitions. We did this quarter accretive acquisitions will expand that margin as well so you've got the four levers and as we've talked before to operational excellence. That's one of the things that gives us some upside as a company because of our maturity and getting those eggs margins there.

So we remain very confident and glad to see the progress start this quarter.

Okay I appreciate all the great color.

Next we'll go to Adam next we'll go to Adam a fall Hymer with Thompson Davis. Your line is now open.

Oh, Hey, there great quarter.

[laughter] was that 60% on an annual basis or are you just saying there might be a quarter out there where you could hit 60% AG margin.

It's on an LTM basis over time, it's a northstar objective, it's not within the year. So we've set a very lofty objective for our team, but as I said in my Grandma's.

Really you know you can get there through all the levers that we have and I just kind of listed those out but I think the operational excellence. One is the one we talked about last quarter. We're just starting to get momentum on that and starting to drop dollars to the bottom line and that's where we really feel we can make progress over time and get to that 60%.

Okay, Thanks, and great quarter.

Thank you.

Next we'll go to Brent Thielman with D. A Davidson your line is open.

Hey, great quarter.

As well thanks.

I mean, not an insignificant amount of capital put to work towards deals through the first half and clear.

Clearly focused on platform expansion.

Hoping you could just comment on what sort of different about the M&A strategy couldn't work today versus what we came to know about the legacy strategy.

Summit, what about these transactions are the characteristics and composition of the deals.

Different from that yield strategy.

Yeah, Great question. Thanks, Brent So you know if we if you go back to when we launched elevate we said we're going to be very materials led and we'd be very selective in the downstream we would only and the big difference is we have been very clear that we will only be in downstream markets, where we can be the leading <unk>.

<unk> and the Arizona materials acquisition is a great example of that where we're entering a high growth markets with our leading position in ready mix. We're really good at the downstream and we're unapologetic about being in it but we're very selective and so you saw the margins come out of that downstream our portfolio is so much better today with.

With the divestitures that we did in some of the underperforming downstream businesses, where we didn't have leading positions. So what we look for is this vertical integration model and if you look at Phoenix, We look at it as an opportunity to maybe replicate in Salt Lake City, which is the market, where we're vertically integrated you compete along every point of the value chain with the same compare.

<unk>, which allows you then to get these high profit high return businesses and we see that we have a pathway through this acquisition to actually replicate our salt Lake City downstream.

Downstream market in Phoenix. So we're very excited about this platform as we move forward and that's a key difference we will not go into positions, where we're like subs positions in a market where your number four or five it has to be a leading position and it has to lead to a path of being materials led just like the Phoenix acquisition, where you have a strong AG space.

It's an ability to bolt on and a largely fragmented market.

Okay.

Okay very good thank you man.

Thanks Brent.

At this time I'd like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad next we'll go to David Macgregor with Longbow Research. Your line is open.

Yes, good morning, and a nice quarter just to clarify on that last M&A question.

Are there other sort of new geographic regions that you are contemplating within your current M&A funnel.

Obviously, you're not going to get into a lot of detail around that but I'm. Just wondering if we're going to see you in entering other new geos.

And then I wanted to.

Principal question I wanted to ask about the.

I agree with cash gross margins go back to that because in your prepared remarks, you cited a couple of drivers.

Drivers of the prior year favorable cost recognition there were some regional differences I'm just trying to get a sense of the improvement you're expecting in those margins in the second half of this year how much of it is just these year ago factors resolving and how much of it is operational improvement that you're achieving right now on a sequential basis.

Yeah. So let me ask the first part of your answer the first part of your question that Scotland addressed your question on the specific margin question. So David as you recall, we announced one at an acquisition in Ocala, Florida that was a great example of a strategic growth market that we had identified and we're in the process of very active building that out right now.

Phoenix is now on our next one and we do have others them for competitive reasons I, obviously won't go into specifics on those but we do have the if you think about our M&A, it's a mix of that going into new platforms strategic high growth platforms, and it's building out from you know make it the circle bigger from where we belonged today and the.

Three the two bags acquisitions were a great example of that bolt on strategy as well. So expect more of the same as is how I would define that Scott maybe you want to address some of those margin questions.

Yeah, So David you called out the favorable cost adjustment.

From a timing issue in the prior year and really all of that amounts to is.

Last year with the rapid pace of inflation, we had to pull forward the standard costing.

End of June usually we do that in Q3, so it's a timing it'll smooth out in Q3 really won't affect the annual performance at all as far as the margin expansion, though you know when I think about the if I isolate the back half I think about the cost coming down from that high single digit really do a mid <unk>.

Digital and then on the pricing side as we've talked about really the back half the comp gets a little harder. So we're probably only going to be at the double digit, but I think that's where we're going to get our expansion that cost is going to be coming off in the back and then as we've already talked about the operational improvement initiatives.

We've got we've got.

$20 million identified and operational improvement initiatives now that I won't I'll hit this year.

But definitely we're going to see some material impact from that in the business does that answer your question David.

It does Scott thanks, very much thanks, Jamie.

Yeah. Thanks, David Okay next we'll go to Jerry Revich with Goldman Sachs. Your line is open.

Yes, hi.

Good morning, and good afternoon, everyone.

I'm wondering if I could just ask regarding the margin progression third quarter versus second quarter, So with the mid year price increases flowing through in <unk>.

AG and cement.

It sounds like we should see margins improving you know more than the two points, we would see under normal seasonality.

Versus <unk>, but I just want to make sure there is.

No other pieces to think about it.

Progression versus a normal seasonality this quarter.

Yeah, I think you know all of the factors that we've talked about and Scott just went through we will continue to be margin progression. I don't think you should see any difference in our seasonality I'm moving through because Q3 is our biggest quarter you know that Gerry and so we would expect a compound you know see additional tail winds up pricing in Q3.

And as Scott referenced the cost should start to moderate and come off and we have our self help initiatives. So you should expect to see margin expansion overtime and that's why we were confident putting the overall expansion of margins in our guide for the full year at 23, 5% to 24%.

Yeah, absolutely just trying to gauge whether there is upside to that and.

And then you know in terms of the pricing outlook, obviously super early for 'twenty four but.

Separately, given the outsized inflation, we're seeing this year are you folks thinking about it for aggregates and cement.

More substantial January one price increases than what we've seen over.

Long term history in this industry of 4% 5%.

Yeah, Scott said costs have not abated, you know, while energy and logistics may have come off a bit we still see a lot of equipment labor and.

And repair and maintenance so the supply chain issues have not resolved, we expect to and you can expect to see us in the marketplace with January price increases across all lines of business.

Thank you.

Okay.

Next we'll go to Kathryn Thompson with Thompson Research Group Your line is open.

Hey, good afternoon. This is actually Brian Biros on for Catherine. Thank you for taking my question.

On asphalt can you just touch more on the outlook here for the segment with public spending coming it seems like asphalt side could really be a pretty big growth engine for you guys. I think you've alluded to that before or is this how much more can volumes go.

Half or even in 2024.

Public activity coming down and are there any headwinds that would kind of limit the growth here for you guys. Thank you.

Yeah, I mean to your point, it's been very robust and I look at our you know if you just look at the I E. J dollars Theyre definitely going in and for the first time, you actually see that in the Texas state budgets and that's our biggest market for asphalt if I look at our backlogs just what's in the backlog today, we're up 40% year on year and we've been.

Another pipeline coming in very strongly after that and with federal funding of the Guy a J a dollars we expect that in the second half.

It'll be strong and continued strong 'twenty 'twenty four should be a very much outsized growth market year on year for public spending and we're seeing it across our entire footprint.

So if you look past you know year to date, we're up on our contract Highway paving awards in Texas by about 41%, Kansas, 85%, Colorado, 71% in Missouri in Utah are up 20% to 25%. So we're very bullish on the public side and feel that our asphalt and grow to your question about headwinds clearly.

Labor is something we're working on we're increasing the size of our crews were planning to be able to meet all the demand that comes but it is a challenge and it will continue to be from a labor perspective, but we've got a great team and great positions in our public markets and are very encouraged by the long term outlook for public moving forward.

Thank you.

Okay.

There are no further questions at this time and Newnan I'll turn the call back over to you for any additional or closing remarks.

Some it's on pace for a record setting year with operational and market tailwind that should push us towards unprecedented levels of growth and profitability.

Positive outlook and raised guidance incorporates strong pricing execution, the operational opportunities that we are actively pursuing across our footprint and the accretive acquisitions, we have already completed.

We are winning in a dynamic marketplace. Thanks to an improved portfolio, a clear strategic direction and a talent rich organization.

We have a full plate of opportunities ahead of us, but our team is animated by pushing our progress further and as intently focused on delivering the financial commitments. We expressed today as always we thank you for your continued support for summit materials and hope you have a great day.

This concludes today's conference call you may now disconnect.

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